Fixed Maturity Plans are closed-ended Mutual Funds with a fixed maturity. They invest in debt instruments which also have a fixed tenure. They come with tenures like 90 days, 180 days, 370 days, 3 years, etc. The maturity of the component instruments is synchronised with the tenure of the fund, such that the fund will hold only those investments whose maturity is the same as that of the fund, or slightly lesser than that. For example, an FMP with a tenure of 1159 days will invest in only those instruments which mature in 1159 days or less. This alignment is aimed at locking the portfolio yield and eliminating interest rate risk, as the investments are held to maturity, and there is no need to liquidate before that due to its closed-ended feature. FMPs are typically low risk investments, and provide the investors the opportunity to invest in a basket of debt products to which they would normally not have access. At the end of the period, the capital invested and the returns earned are given to the investor.

FMP Portfolio

The FMP portfolio comprises of varied money market instruments like Treasury Bills (T-bills), Non-Convertible Debentures, Government Bonds, AAA rated Corporate Bonds, Commercial Papers(CPs), Certificates of Deposit (CDs), Bank FDs, etc. These instruments are not generally accessible to retail investors who have smaller ticket size. However, retail investors can take exposure in these money market instruments through FMPs.

The case for long term FMPs

While short-term FMPs have no tax advantages over other short-term debt products, long term FMPs are still seen as a more efficient tax-saving option than products like Fixed Deposits (FDs). FMPs of more than 3 years qualify for long-term capital gains tax, which is at 20% with indexation (inflation adjustment). This would be more beneficial for an investor who falls in the highest tax bracket of 30%, as products like FDs attract a capital gain tax of 30% for such investors. Short-term FMPs attract a capital gain tax of 30%; hence investors falling in lower tax brackets are better off investing in FDs which are taxed as per the income tax slab of the investor.

Other advantages of investing in long term FMPs are:

• Capital protection: Since FMPs mostly invest in high-quality papers, there is a very minimal chance of losing your capital due to default. Investors can therefore expect capital guarantee along with well estimated returns.
• Risk mitigation: FMP fund managers have a strategy of hold-to-maturity, and hence are not affected by market risk. Due to this strategy, the returns are fairly estimable, though there is a rare possibility of a default in one of the papers, which would affect the FMPs return.
• Indexation benefits: This significantly reduces the tax liability of the investors, as explained above.
• Steady Returns:FMPs hold debt products and hence the returns are quite stable. They generate 0.75-1 percent higher returns than FDs. These returns are not guaranteed, unlike bank FDs, but are reasonably probable.
• Long term investment: FMPs are a good long-term product if one has surplus funds which may not be required in the foreseeable future. Lock-in restrictions and hold to maturity strategy gives the fund manager the ample leeway to invest in long-term debt products which earn higher interest.

Drawbacks of FMPs

While there are many reasons to invest in FMPs as a part of one’s portfolio diversification strategy, there are some concerns one must consider before investing in them:

• Short term FMPs offer no real advantages over other debt products, and are not tax efficient. In fact, they are taxable on the assumption that the investor falls in the highest tax bracket, and is disadvantageous to investors falling below this bracket.
• They do not offer guaranteed returns like FDs. Since they are not bank products, there is no guaranteed rate of interest. The returns are tentatively estimated and there can also be a possibility of default of some instruments.
• FMPs carry credit risk and the returns are dependent on the issuers of the debt instruments honouring their payments on time. Even a single security defaulting can affect the overall returns of the fund. Hence, investors must keep a tab on the FMP portfolio and find out the credit rating of the underlying instruments to analyse the risk.
• FMPs are illiquid. They are listed on the exchanges, but due to low volumes, it is very difficult to find a buyer. One should invest in FMPs only if he has the capacity to hold till maturity, as there is no facility for premature withdrawal, unlike many other debt schemes.

Thus, FMPs are good long-term products that provide reasonable returns by investing in money market instruments. They are best for investors looking for parking surplus funds, however, there are a few risks attached to them; and one should read the Scheme Information Document carefully to understand the product and its components.

FAQs

1. Why do FMPs have durations like 1,159 days or 1,386 days instead of 3 years or 4 years?

FMPs take a strategic decision to launch FMPs nearing the end of the financial year for such number of days, so that the duration becomes slightly more than 3 years, and hence indexation benefit can be claimed for 4 years.

2. When should one invest in FMPs?

A good time to invest in FMPs is when the interest rates are increasing. You can lock-in your returns at an increased rate for the next 3 years; for a 3-year FMP.

3. What is the difference between a FD and FMP?

There are many differences between FD FMP. Some are given below:

4. How does indexation work in case of FMPs?

Indexation is the adjustment of the amount of money invested in FMP by subtracting the inflation on the amount for every year of the holding period of FMP. Inflation is generally taken from Cost Inflation Index (CII). Below is an example to show how indexation benefits the investor.